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Matthew Wall 30.11.


Interest rates are at record lows, so why is it that overdraft charges have reached new
highs? Matthew Wall reveals how the banks are taking us for a ride.


Banks are charging extortionate levels of fees and interest on nearly Ä10 billion worth of
overdrafts in a bid to claw back lost profits. Moneywise can reveal that the industry is
still cashing in around Ä2.5 billion a year from overdrafts, despite consumer and
regulator attempts to challenge unfair charges and reform the market.

Pincer movement

In recent months, typical authorised overdraft rates levied by the major high street
banks have soared to an all-time high of around 19%, despite interest rates having
remained at an historic low of 0.5% for more than 20 consecutive months.

During this period, more than a quarter of current accounts have seen an increase in
authorised overdraft rates, according to Moneyfacts, the financial data provider. And in
July, a report by wealth manager SG Hambros found that average unauthorised
overdraft rates amounted to a staggering 167% a year once additional charges had
been taken into consideration.

The shocking truth is that, these days, entering into unauthorised overdraft territory can
be more expensive than taking out a payday loan with a typical APR of several hundred
per cent.

Defending the trend, Lesley McLeod, spokesperson for the British Bankers' Association,
which represents over 200 banks, says:

"After the credit crunch, the pricing of risk has increased, so the cost of lending has
increased. And overdraft facilities, whether they're drawn down on or not, now have to
be covered under the Capital Requirements Directive.

"However, around 85% of current account holders don't pay any unauthorised overdraft
charges at all."

This is, in effect, an admission that the cost of the banking crisis - caused largely by
banks' own reckless lending and speculative investment in complex financial
instruments that not even they understood - is now being passed on to consumers, just
as the government's proposed Ä2.5 billion bank levy is likely to be.

In a vicious pincer movement, the banks are increasing the cost of overdrafts with one
hand, while reducing interest on in-credit balances with the other.

Over half of all current accounts now no longer to pay interest on balances - including
NatWest and RBS - and more than a quarter pay 0.1% or less. So with inflation
currently running at around 3%, customers who keep their current accounts in credit are
effectively losing money.

Failed fightback

In 2008 the Office of Fair Trading (OFT) found that a third of bank revenue from
personal current accounts came from unauthorised overdrafts, which were - in its own
words - "difficult to understand, not transparent, and not subject to effective customer

Over a million disgruntled customers had complained about what they considered to be
unfair bank charges.

The OFT agreed to take a test case to court under the Unfair Terms in Consumer
Contracts Regulations. The Supreme Court finally ruled in November 2009 that the
fairness of these charges couldn't be challenged on the basis of the test case. Its
decision took the wind out of the campaign's sails and appeared to let the banks off the

Meanwhile, the Financial Ombudsman Service (FOS) reported that the number of
complaints it received about current accounts nearly doubled in the 2009/2010 financial
year - up 85% on the previous year. Many of these concerned financial hardship and
the way bank charges made difficult situations worse - for example, when automatic
direct debit payments pushed people into the red.

The FOS also dealt with a backlog of 15,000 complaints about unauthorised overdrafts.
Opaque charges

While the OFT says it won't take further legal action, it does acknowledge that banks
could be "far more transparent" in their overdraft charging structures and that it's "very
difficult" for consumers to compare accounts on a like-for-like basis.

This is a partly a result of consumers failing to shop around, which in turn means
competition between the banks is not as effective as it should be.

Since the Supreme Court ruling, the OFT has been working behind the scenes,
encouraging banks to improve the clarity of the information they provide. Most banks,
for example, now publish 'charging scenarios' on their websites. Even so, these
scenarios often still hide the true cumulative effect of charges and interest, and can be
almost impossible to understand.

Take HSBC's 'overdrafts and charges' webpage. One scenario states: "A payment from
your account takes you into an informal overdraft, and you make nine more payments
from the account while you are overdrawn or over your limit. Charge: Ä125."

This is confusing enough - but the footnotes then acknowledge that "an additional
charge of Ä25 could be levied if a formal overdraft had been agreed within the last six

So your total charge in this case would actually be the bank's monthly maximum of

What's more, under HSBC's new charging structure, which takes effect from December,
customers who are refused an 'informal' overdraft and don't have sufficient funds in
their accounts to cover outgoing payments will be charged an eye-watering Ä25 per
payment request over Ä25 that has to be returned.

So if you pay your bills by direct debit - gas, electricity, water, and home insurance, say
- you could be clobbered with fees of more than Ä100, plus debit interest, each time you
go 'informally' overdrawn.

Note the change of language here. HSBC now calls breaching your 'formal' overdraft
limit a de facto application for an 'informal' overdraft. This smacks of banks attempting
to re-brand unauthorised overdrafts to defuse recent bad publicity.

Similarly, Barclays has introduced the concept of a 'personal reserve' - a borrowing

buffer zone of up to Ä2,500 that still allows payments from your account to be honoured
even if you've inadvertently breached your agreed overdraft limit by as little as Ä1.

This means you incur a 'reserve usage fee' of Ä22 that gives you the right to use this
reserve for five working days. If you're still beyond your overdraft limit after that, you
incur another Ä22. But if you exceed your overdraft limit and you haven't applied for a
reserve, then all your standing orders, direct debits and cheques will be returned unpaid
at Ä8 a pop - up to a maximum of Ä40 in charges each day.

Other banks call this facility an 'overdraft buffer'. It may not attract interest but you still
have to pay a fee for it. So, in effect, the unauthorised overdraft has simply been re-

Looking forward...

The OFT is currently adopting a softly-softly approach with the banks, encouraging
them to get their house in order by 2012, and threatening them that otherwise it may still
recommend that the government introduces a change in the legislation. In the
meantime, it has persuaded some banks to offer customers the chance to 'opt out' of
unauthorised overdrafts altogether.

However, it remains unclear how this will prevent banks penalising customers without
sufficient funds in their accounts when direct debits and standing orders are failed or

…and in the here and now

If you want a decent interest-free overdraft now, you tend to have to pay a daily or
monthly fee for it. For example, Barclays Premier Account holders may receive an
interest-free overdraft of up to Ä1,000, but they have to pay Ä25 a month.

Halifax and Bank of Scotland, meanwhile, don't charge interest on overdrafts but do
charge 'usage fees' of Ä1 a day for overdrafts up to Ä2,500, and Ä2 a day for overdrafts
over Ä2,500.

So does all this mean the days of fee-free banking are coming to an end? The BBA's
McLeod says: "The 'free while you're in credit model' isn't in jeopardy at all. But if people
take money which isn't theirs and for which they haven't arranged a borrowing facility,
they must expect to pay for it. Consumers have an obligation to shop around for the
product that's right for them."

However, until switching is made easier, charging transparency improved and

competition boosted, it seems that the cost of the banks' own financial mismanagement
will continue to fall on the shoulders of their customers.

If you think you've been treated unfairly by your bank or building society, first complain
to the bank itself. If it doesn't address your complaint to your satisfaction, you can seek
advice from your local Citizens Advice Bureau ( or complain to
the Financial Ombudsman Scheme (